Unilateral, bilateral, or tariff-free: How tariff structures affect competing manufacturers in a cross-border supply chain?

Abstract

To examine the impact of different tariff structures on cross-border supply chains and support multinational corporations in addressing trade frictions and policy formulation, this paper constructs a three-tier cross-border supply chain model comprising domestic suppliers, domestic manufacturers, and multinational manufacturers. It analyzes equilibrium decisions under tariff-free, unilateral tariff, and bilateral tariff scenarios. Using reverse induction, the optimal pricing and profits of supply chain members are determined, with a focus on analyzing the effects of key factors such as the tariff application stage, raw material costs, and market competition intensity. Findings reveal that tariffs influence upstream and downstream pricing through cost pass-through: when applied to final goods, suppliers gain bargaining power and raise wholesale prices; when applied to intermediate goods, suppliers are forced to lower prices to maintain sales volume. Manufacturers' selling prices and market demand are jointly regulated by cost and competition effects, exhibiting non-monotonic changes under bilateral tariffs that reflect the dynamic trade-off between cost-driven increases and demand contraction. Profit analysis indicates that when tariffs are applied to final goods, multinational manufacturers can pass on the tax burden by raising prices when raw material costs are low, potentially achieving higher profits than in a tariff-free scenario. When tariffs target intermediate goods, multinational manufacturers bear the brunt of the burden, exhibiting a “reverse pass-through” effect. Bilateral tariffs consistently represent a suboptimal choice for multinational manufacturers, demonstrating that retaliatory tariffs fail to improve their profitability. Under asymmetric tariff scenarios, the interaction between tariff intensity, costs, and competitive strength further influences corporate strategy choices.